Subscribe (Free) to
Daily or Weekly Newsletters
Post a Job

Featured Jobs

Retirement Plan Consultant

DWC - The 401(k) Experts

DWC - The 401(k) Experts logo

Sr. Benefits Plan Administrator

The Catholic Diocese of Arlington
(Arlington VA)

The Catholic Diocese of Arlington logo

Director, Business Development

National Benefit Services, LLC
(Remote / West Jordan UT)

National Benefit Services, LLC logo

Pension Plan Administrator

DeMars Pension Consulting Services, Inc.
(Overland Park KS)

DeMars Pension Consulting Services, Inc. logo

Retirement Plan Administrator

Premier Plan Consultants
(Remote / San Diego CA)

Premier Plan Consultants logo

DC Plan Administrator

Farmer & Betts, Inc.
(Remote / Tacoma WA / CO / OR)

Farmer & Betts, Inc. logo

Strategic Relationship Manager

401K Generation, Inc.
(Altamonte Springs FL)

401K Generation, Inc. logo

Retirement Plan Administrator +

Steidle Pension Solutions
(Remote / NJ / PA)

Steidle Pension Solutions logo

Retirement Plan Consultant

The MandMarblestone Group, llc
(Remote / Philadelphia PA)

The MandMarblestone Group, llc logo

Senior Retirement Account Representative

Ohio Pension Services
(Akron OH)

Ohio Pension Services logo

Senior Retirement Plan Administrator

TPS Group
(Remote / Buffalo NY)

TPS Group logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Use Of LLCs To Change Employee Status

(Posted August 30, 2001)

Question 122: "Corporation A" has proposed that each of its top salespeople create an LLC of his or her own, with which the corporation will contract. Each salesperson will be the sole owner of his or her LLC. The corporation hopes to eliminate these individuals as employees and deal with the LLCs on an independent contractor basis. Will that work to keep them out of the corporation's retirement plan? Will the corporation have to pay payroll taxes for these workers?

Answer: If the salespeople are employees now (and it sounds like they are), simply putting in an LLC will not change anything at all for federal tax or pension purposes.

Tax law deals with several classic types of businesses: sole proprietorships, partnerships, corporations, and trusts are the primary categories. At the end of the 20th century, new forms of organization, such as LLCs, burst on the scene. In response, the IRS substantially changed its regulations to create a simple scheme for putting the new square pegs in the old round holes.

Under the new regulations, LLCs can choose to be taxed as corporations. Most do not. If an LLC is not taxed as a corporation and it has more than one owner, it is taxed as a partnership. If the LLC has a single owner, however, the regulations say it is disregarded as a separate entity. In other words, the tax laws ignore the existence of the LLC altogether and tax the owner as a sole proprietor.

So, what this plan does is take a bunch of employees and set up contracts with each to say they are independent contractors. While courts do look to independent contractor agreements in close cases, they are rarely key factors in determining employee status. If there is no real change in operating procedures -- if the corporation has the same level of control over its salespeople as it does now -- then the status of the worker as an employee, rather than as an independent contractor, has not changed.

As a result, the corporation still must withhold taxes from each worker's pay. Moreover, nothing has changed about the worker's status for employee plan purposes, unless the plan excludes workers who are not paid as employees (whether they actually are employees or not). If the plan does have such a clause, the workers would not be participants, but they should still be counted in determining whether the plan meets the eligibility requirements of the Internal Revenue Code.

All in all, it sounds like a poor idea.

For more information on the entity rules and their effect on employee status, see Chapters 1 and 2 of my book, Who's the Employer?, second edition.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021, Inc.